Housing Starts Plunge to Three-Year Low

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1. Housing Starts Plunge to Three-Year Low
2. Homebuilder Confidence Sinks to 15-Year Low
3. Inflation Pressures Ease in August
4. WSJ: Gulf Discovery Fuels Search for Deep Oil

1. Housing Starts Plunge to Three-Year Low

MoneyNews readers will recall that several homebuilders have warned that their earnings will come in lower than expected due to buyer cancellations and low demand for new homes. Today's housing starts report bears that out.

Housing starts plunged 6 percent in August and slowed to the lowest rate since April 2003, says the Commerce Department. Housing starts are down almost 20 percent year over year, according to Reuters.

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The number of homes builders broke ground on slowed to an annual pace of 1.665 million units, down from a revised 1.772 million units in July. That was much lower than the 1.75 million units economists were expecting based on July's original report of 1.795 million units.

Sinking housing starts reflect the glut of homes already on the market and slowing sales for homebuilders. The inventory of new homes for sale rose to a record in July. The National Association of Realtors says that housing starts may decline as much as 10 percent in 2006.

Building permits declined for the seventh straight month, hitting a four-year low. Lower demand for building permits indicates that the housing slump will continue for some time.

"There's no doubt the housing market is declining and we expect it to continue to decline through most of 2007," Phillip Neuhart, an economist at Wachovia Corp., tells Bloomberg News.

Construction of single-family homes fell 5.9 percent to 1.36 million annual rate. That's the lowest since February 2003. Construction of multifamily homes, including townhomes, condos, and apartment buildings, fell 6.7 percent to an annual rate of 305,000.

The Midwest experienced the biggest drop in housing starts, a 12 percent decline. In the South, housing starts fell 6.1 percent, while the West saw a 5.5 percent decrease. In the Northeast, however, housing starts rose 5.4 percent.

Editor's Note:

Sir John Templeton first warned housing prices could crash 50%. Discover how to protect yourself and even profit from the housing crash. Go here now.

2. Homebuilder Confidence Sinks to 15-Year Low

A survey of homebuilders revealed that their confidence in the industry fell for the eighth straight month in September to the lowest level in more than 15 years, says the National Association of Home Builders.

The NABE's index of homebuilder sentiment fell 3 points in September to 30, its lowest reading since February 1991. Back then the economy was in a recession.

A reading below 50 indicates that homebuilders view the current market as unfavorable. This is the fifth straight reading under 50, according to Moody's Economy.com. A year ago, the index was at 65.

Today's housing starts report definitely shows that homebuilders have reason to worry.

The National Association of Realtors says that home sales will likely drop 8 percent in 2006 and will fall another 2 percent next year. The NAR forecasts that home prices will rise just 2.8 percent this year, following a 10.5 percent rise in 2005.

Rising interest rates and rising home prices have hurt affordability. The NAR's measure of housing affordability fell to a 17-year low in July. All of these factors are hurting homebuilder confidence.

Right now, homebuilders are offering pricey incentives to buyers such as free granite countertops, pools, etc, which are cutting into their profits but are helping to buoy sales. However, Wells Fargo & Co. Chief Executive Officer Richard Kovacevich tells Bloomberg, "We will see over the next five or six months inventories increase quite substantially" as incentives aren't enough to bring in buyers.

In contrast to housing starts, homebuilder sentiment was worse in the Northeast, declining six points to 28. Sentiment fell five points in the West and three points in the South, for a reading of 38 in both regions. Sentiment in the Midwest, which saw the biggest drop in housing starts, remained flat at a very poor 16, according to Economy.com.

Editor's Note:

Sidestep the slumping housing market. Discover how to invest in sectors the smart way. Go here now.

3. Inflation Pressures Ease in August

Prices at the wholesale level edged up modestly in August, providing further evidence that inflation pressures are easing.

The Labor Department reported that wholesale prices edged up 0.1 percent last month as gasoline prices fell, helping to offset a jump in food costs.

Outside of energy and food, core inflation was even better behaved, falling by 0.4 percent after a 0.3 percent decline in July. It marked the first back-to-back declines in core inflation in more than three years.

In other economic news, home construction dropped a sharp 6 percent in August, a much bigger decline than analysts had been expecting.

The Commerce Department said that work was started on 1.665 million homes at a seasonally adjusted annual rate last month.

The good news contained in the department's Producer Price Index followed a report last week that inflation at the consumer level also moderated in August, rising by just 0.2 percent.

Both months reflected a slowdown in energy prices, which rose by just 0.3 percent at the wholesale level in August after a huge 1.3 percent jump in July. Gasoline prices actually fell at the wholesale level last month, dropping 2.2 percent, the biggest decline in seven months.

With surveys showing further gasoline price declines in recent weeks, analysts were looking for more good news on inflation in the September price reports.

Falling gasoline prices will leave consumers with more money to spend on other items. This should provide fuel to keep the economy moving ahead, easing worries that the recent slowdown in consumer spending could worsen into an outright recession.

Analysts said the Federal Reserve appears close to achieving its hoped-for soft landing in which growth slows enough to keep inflation pressures contained but not so much that the economy dips into a downturn.

The Fed in August left interest rates unchanged, marking the first pause after 17 consecutive rate hikes. Economists are expecting the Fed to keep rates on hold when they meet again on Wednesday.

For August, the 2.2 percent drop in gasoline prices, the biggest fall since an 11.2 percent plunge in February, helped to offset increases in other types of energy. Natural gas destined for home use was up 1.6 percent while electricity for the home rose by 1.3 percent.

Food costs shot up 1.4 percent in August after having declined by 0.3 percent in July. The price of fresh vegetables, fruit and eggs all posted big increases.

Outside of the volatile food and energy sectors, the 0.4 percent drop in core inflation reflected big declines in the cost of new vehicles. The price of light trucks dropped by 3.4 percent while the cost of passenger cars was down 2.6 percent.

The latest price changes showed wholesale prices have risen by 3.7 percent in the past 12 months while core inflation, which excludes energy and food, was up by just 0.9 percent.

Editor's Note:

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4. WSJ: Gulf Discovery Fuels Search for Deep Oil

The discovery of oil 20,000 feet below the sea floor of the Gulf of Mexico by Chevron, Devon Energy, and Statoil two weeks ago may just spark an "oil rush" to find crude in deep water.

"The development could herald a vast energy-producing region in the U.S.'s backyard," says the Wall Street Journal. "Similar cutting-edge technology could be used to find oil in a number of other regions around the world, including Mexico, Mauritania and Malaysia."

The Journal says that deep-water oil exploration is accelerating around the globe. Behemoth oil companies such as Exxon Mobil, BP, Royal Dutch Shell, and Petroleo Brasileiro are best equipped to invest in deep-water drilling. But smaller companies like Devon and Anadarko Petroleum are also joining with the big boys.

In addition to the Gulf of Mexico, other deep-water oil discoveries have been found off the coasts of Brazil, Nigeria, and Angola, says the Journal. MoneyNews readers should remember Brazilian President Luiz Inacio Lula da Silva christening an offshore oil rig in April that produces 180,000 barrels of oil a day, giving Brazil oil independence.

As for prospects of new discoveries, the South China Sea and the coasts of India, Pakistan, Mauritania, Egypt, Malaysia, and Mexico offer potential oil and natural gas finds.

Robert Esser, director of global oil and gas resources for Cambridge Energy Research Associates, says that deep-water oil "is a major source of new production as it expands more in the Gulf of Mexico and Brazil and especially in West Africa."

Esser tells the WSJ that oil produced by deep-water wells will increase from two million barrels per day to 10 million barrels a day by 2015.

Editor's Note:

In April 2004, Financial Intelligence Report predicted that oil prices would skyrocket from $29 per barrel to over $60 within a year. That forecast was dead-on. Our investors made a fortune on that advice. Since then FIR has been warning that oil prices would collapse in the next 12 months and could go as low as $40 per barrel. Discover the top 5 ways you can profit from the coming Oil Bust. It's already begun! Go Here Now.

Editor's Notes:

Sir John Templeton first warned housing prices could crash 50%. Discover how to protect yourself and even profit from the housing crash. Go here now.
Sidestep the slumping housing market. Discover how to invest in sectors the smart way. Go here now.
Discover how to hedge your portfolio against inflation … without investing in a single stock. Go here now.
In April 2004, Financial Intelligence Report predicted that oil prices would skyrocket from $29 per barrel to over $60 within a year. That forecast was dead-on. Our investors made a fortune on that advice. Since then FIR has been warning that oil prices would collapse in the next 12 months and could go as low as $40 per barrel. Discover the top 5 ways you can profit from the coming Oil Bust. It's already begun! Go Here Now.
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